The Rational Reminder Podcast

Episode 270: Victor Haghani and James White: The Missing Billionaires

Sep 14, 2023

Finance professionals and authors Victor Haghani and James White discuss the puzzle of missing billionaire families and the impact of poor financial decisions. They explain the Merton model, expected utility theory, and dynamic asset allocation. They also explore optimal lifetime spending solutions and the relationship between money and happiness. A valuable resource for better financial decision-making.

01:36:03

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Episode guests

James White

Victor Haghani

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Quick takeaways

Poor risk decisions and not considering uncertainty are identified as key contributors to the puzzle of the missing billionaires.

Understanding risk and making coherent risk decisions is crucial in financial investing.

Utility-based preferences can guide more effective financial decision-making and help investors navigate asymmetric return profiles and skewed expected return distributions.

Options are generally not suitable for retail investors and should be used cautiously with a solid understanding of their complexities and limitations.

Deep dives

The Puzzle of the Missing Billionaires

The podcast discusses the book 'The Missing Billionaires' and examines why there are no billionaires today who trace their wealth back to the wealthiest families of 1900. The book explores the concept of making better financial decisions and highlights the challenges individuals and families face in growing and maintaining their wealth. Poor risk decisions and not considering uncertainty are identified as key contributors to the puzzle.

Understanding Utility and the Merton Share

02:17

Understanding the Effectiveness of Measures like One over Cape for Forecasting Returns

01:54

The Misconceptions Around Utility and Its Application

00:50

Introduction

2min

Impressive Book Endorsements and Backgrounds of the Authors

2min

The Puzzle of the Missing Billionaires

18min

Understanding Utility and the Merton Share

10min

Understanding the Effectiveness of Measures like One over Cape for Forecasting Returns

2min

Dynamic Asset Allocation Without Expected Returns

8min

Understanding Expected Utility and Its Relation to Utility

5min

Money, Happiness, and Personal Finance

29min

Determining Utility Function and Risk Aversion

20min

If the wealthiest families of the past century spent a reasonable amount of their wealth, invested in the stock market, and paid taxes, there would be thousands of billionaires today. But there aren’t. So, what happened? To answer this question, we are joined by authors and finance professionals, Victor Haghani and James White. Their recently released book, The Missing Billionaires: A Guide to Better Financial Decisions, uses the missing billionaires puzzle to explore how and why most investors fail to capture the returns offered by the market. Victor was a founding partner of Long-Term Capital Management (LTCM), the multi-billion-dollar hedge fund that famously collapsed in 1998 and nearly took the global financial markets down with it. His participation in the downfall of LTCM led him to reassess much of the way he thought about investing, and in this episode, he shares some simple but powerful frameworks and personal finance recommendations. We also receive accessible explanations of the Merton model and expected utility theory from James, take a deep dive into dynamic asset allocation, discuss optimal solutions for lifetime spending, and learn more about the certainty equivalent return and Sharpe ratios, plus so much more. Whether you’re an entrepreneur invested in your own business or simply focused on building long-term wealth, Victor and James’ book (and this conversation about it) will be a valuable resource for better financial decision-making, so be sure to tune in today!

Key Points From This Episode:

(0:05:19) The puzzle of the missing billionaires (and why it matters to Victor and James).
(0:09:45) Some common but critical financial decision-making problems most people face.
(0:12:39) Unpacking the coin-flipping experiment in their ‘What's Past is Not Prologue’ paper.
(0:19:57) What investors should aim to maximize when sizing positions in risky assets.
(0:24:22) An example that illustrates how the Merton model relates to bullish bets.
(0:29:04) What the Merton share tells us about dynamic asset allocation if it is or isn't possible to estimate expected equity returns.
(0:35:29) How real expected returns affect optimal risky shares for long-term investors.
(0:37:29) Different ways to forecast volatility to determine the optimal risky share.
(0:42:00) Easy-to-understand definitions of the utility curve and expected utility theory.
(0:50:20) Using the certainty equivalent return and Sharpe ratio to evaluate investments.
(0:57:56) Whether or not options belong in the portfolios of typical retail investors.
(0:59:01) If expected utility is a good model for normative personal finance recommendations.
(1:05:16) How Victor’s experience with LTCM affected him, both professionally and personally.
(1:09:08) What optimal solutions for lifetime investing and spending look like.
(1:22:22) Questions to ask yourself to work out your own utility function and risk aversion.
(1:28:19) Victor and James’ parting financial advice and respective definitions of success.